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Renewable Energy Opportunities and Issues on the Outer Continental Shelf

Written testimony presented to the Joint Hearing of the Subcommittee on Fisheries, Wildlife and Oceans and the Subcommittee on Energy and Mineral Resources Committee on Natural Resources U.S. House of RepresentativesApril 24, 2007

I have been asked to discuss the current
regulatory structure for offshore wind, wave, and current projects, what
Federal agencies are in charge, the role of States, and what Congress can do to
clarify the existing regulatory structure.
My current understanding of the regulatory structure relating to
renewable energy projects on the US outer Continental Shelf (OCS) draws
from my recent work with colleagues on the design of a national policy framework for the siting
of coastal-ocean wind power. Concerning
this work and in portions of this testimony, I would like to acknowledge the
help of my colleagues, Ms. Mary Schumacher and Dr. Hauke Kite-Powell at Woods
Hole and Professor John Duff at the University of Massachusetts Boston.

Our recent work seeks to clarify
the national, regional, and local decisions about the siting of wind power
facilities in the US
coastal ocean. Its main conclusions are
general enough to be of relevance to the siting of offshore wave and current projects as well. One of our main goals has been to
identify and characterize the common features of a land and resource management
system that are appropriate for the siting of wind power in the US coastal
ocean. My testimony today will focus mainly on the
findings of our study relating to those features of the policy framework that
may help Congress clarify the regulatory structure.

Ocean Space as the Relevant Resource

In the context of renewable
energy facilities, the relevant resource to be allocated is ocean space. With respect to ocean wind power, ocean space
may be characterized by its average wind speed, wind consistency, distance from
electrical transmission facilities, distance from electrical consumers, and
exposure to adverse weather conditions, among other qualities. The existence of quality differences across
ocean areas implies that, like good cropland, ocean space with the right
qualities may be a scarce natural resource.As a consequence, ocean space useful for wind farming or other renewable
energy production may have economic value.Further, ocean space may have value for other human uses, including
commercial fishing, marine aquaculture, recreation, environmental conservation,
shipping, among many others.Consequently, there may be significant opportunity costs from a decision
to allocate ocean space for renewable energy development (or, alternatively,
for other purposes).

There is no private market for
ocean space. Specialized institutions
must be devised, if they do not yet exist, for allocating ocean space for renewable
energy development. The existence of
institutions to establish legal interests in ocean space and to provide a means
for enforcement against any infringement of these interests is critical. Such legal interests are one key component of
a policy framework for allocating ocean space that is needed to enable the
development of renewable energy in the ocean as a productive industry. The features of a policy framework may
influence the extent to which the siting of ocean renewable energy is
economically efficient.

The
siting of renewable energy facilities does not involve an exclusive use of
ocean space in all cases. It is
necessary to determine which other uses are compatible with renewable energy
and which are to be lessened or excluded.For example, some types of aquaculture and recreational fishing may be
compatible with renewable energy, while certain kinds of commercial fishing
(dragging the seafloor with trawl nets) and the aesthetic appearance of the
seascape may not. In making decisions
about compatibility and exclusivity, it is critical to quantify tradeoffs in
economic terms, where feasible.Importantly, the economic concept of “resource rent,” representing the
value of ocean space as a scarce resource, should be utilized in analyzing such
tradeoffs.

It is relatively straightforward to estimate
resource rents associated with commercial activities and progressively more
difficult to estimate the value of uses that are further removed from markets,
such as recreation, aesthetics, or the benefits of environmental amenities. Consequently, the opportunity costs of allocating
areas for specific uses or for specific combinations of uses can be
uncertain. Similarly, there is
uncertainty about the non-market values of modifications in seabird or subsea
habitat when a renewable energy facility is sited. Even the opportunity costs of displacing
commercial uses, such as shipping and fishing, can involve uncertainty in their
calculations.

It is important for a
disinterested party to undertake economic studies, such as studies to estimate
resource rents and non-market values. Although
stakeholders, such as prospective developers or nongovernmental organizations,
may wish to conduct or sponsor their own analyses, there is the clear
possibility of bias built into assumptions and hidden in the results. Typically, the government would conduct
policy analyses or contract for studies to be undertaken by independent
analysts. Although arguably more
credible than analyses conducted by stakeholders, the government, too, may not
be a completely disinterested party.Therefore, the results of such analyses should be subject to a
scientific peer-review.

Current Regulatory Structure, What Federal Agencies are in Charge, and the Role of States

The
federal “permitting” process has until recently been based upon section 10 of
the 1899 US Rivers and Harbors Act (RHA), which assigns jurisdiction to the US
Army Corps of Engineers (ACoE) to regulate obstructions to navigation in the
navigable waters of the United States and on its outer Continental Shelf
(OCS). While navigational issues still
are paramount, recent legislative developments would seem to acknowledge that
the RHA is inadequate for making decisions about the exclusive use of the ocean
for permanent activities such as electrical power generation from renewable
energy.

Section
388 of the Energy Policy Act of 2005 [P.L. 109-58], which was signed into law
by President George W. Bush on August 8, 2005, assigns responsibility for the
design and implementation of a policy framework for siting renewable energy
facilities in the ocean to the Minerals Management Service (MMS) in the US
Department of the Interior. MMS is now
in the process of drafting interim regulations under the authority of the Outer
Continental Shelf Lands Act Amendments of 1978 to grant leases, easements, or
rights-of-way for siting facilities that produce, transport, or transmit energy
from sources other than oil and gas, including renewable energy
facilities. These rights are to be
granted on a competitive basis, unless a determination of “no competitive
interest” is made.

Additional
provisions of the Energy Policy Act require MMS to establish financial terms
that ensure a fair return to the United States for the granting of these rights
and to set up a revenue-sharing program with coastal states for grants within
three nautical miles of a state’s submerged lands, analogous to the existing
8(g) program for OCS mineral leasing.MMS is now to act as the lead agency in coordinating the actions of
other agencies in siting decisions.

Another
important component in the development of MMS policy has been the drafting of
offshore administrative lines from adjoining coastal states. These
administrative lines will serve a number of important functions, such as
helping MMS determine which states have prevailing interests in extended offshore
areas because of the growing number of commercial activities on the federal
OCS; providing a basis for accurate delineation of OCS planning areas;
assisting in development and evaluation of “affected State” status under the
Coastal Zone Management Act and the OCS Lands Act; assisting in the required
comparative analysis by MMS to determine an equitable sharing of developmental
benefits and environmental risks; and helping define appropriate consultation
and information sharing between MMS and coastal states.

While
this assignment of authority to MMS renders moot the question of the adequacy
of the RHA as a legal means for providing access, the issues that arise with
coordinating responsible agencies will not disappear. In particular, an RHA §10 permit for potential
obstructions to navigation will still be required among other approvals or
reviews by numerous federal and state agencies.Further, there is now a requirement that energy-related activities
authorized under these new provisions “are carried out in a manner that
provides for . . . prevention of interference with reasonable uses of the
EEZ.” The Secretary of the Interior is
accorded discretion in determining what uses are to be classified as
reasonable.

Based
upon our review of policy frameworks in Europe and on the US public
lands, we find that most successful policy frameworks feature a lead agency
that is responsible for resource assessments, area selections, and allocations
for specific resources. A lead agency
with a “place-based” orientation is more likely than one with a “functional”
orientation to allocate access to and to manage an area under its jurisdiction
within a framework of multiple-use planning that takes the opportunity costs of
alternative uses (including non-uses) into account. At least in principle, such an agency is
better suited to advance a complex mix of policy objectives, such as energy
diversification, environmental protection, resource conservation, and a fair
return to the public, among others.

Because
MMS now has primary responsibility for regulating offshore renewable energy
development on the OCS, MMS also has lead agency responsibility under the
National Environmental Policy Act (NEPA) for conducting environmental assessments
and drafting environmental impact statements.Further, as lead agency, MMS has the responsibility for coordinating
permitting and environmental review undertaken by other federal agencies under
a wide variety of other laws and policies.

At
the federal level, such permitting and review includes, but may not be limited
to the following: Section 7 consultations triggering potential biological
assessments under the Endangered Species Act for interactions with protected
species (NMFS); permits for harassments or incidental takes under the Marine
Mammal Protection Act (NMFS); conservation assessments for potential impacts on
essential fish habitat under provisions of the Magnuson-Stevens Fishery
Conservation and Management Act (NMFS and the regional Fishery Management
Councils); permits for dredge and fill activities under provisions of Section
103 of the Ocean Dumping Act and Section 404 of the Clean Water Act (ACoE and
EPA); taking into account under section 106 of the National Historic
Preservation Act of any impacts on historic resources deemed eligible for
listing on the National Register of Historic Places (NPS); and permits for
private aids to navigation (USCG).

Even
when the proposed location for an offshore renewable energy facility is in
federal waters, a number of state agencies will also play some role in the
siting process. Among other possible sources of state jurisdiction, state and
tribal governments have standing as “stakeholders” under the NEPA requirements
for environmental impact review; and, under the Coastal Zone Management Act,
most uses of coastal federal waters must be consistent with any affected
state’s definition and authorized uses of its “coastal zone.”

This
long list of review authorities ostensibly may appear to be both confusing and
evidence of a lack of integration in marine policy. Moreover, the amount of interagency
coordination and the number of required approvals has been blamed for retarding
the nascent industry’s growth. Notwithstanding
these concerns, to a large extent, the multiple approval process cannot be
circumvented easily, and it cannot be easily harmonized further by
administrative reorganizations, mandates for regional management, or devolution
of authority to coastal states. What is
critical is that a lead agencyhere MMSserves as a facilitator of this
process, establishing a form of “one-stop shopping” in ocean-space allocation
decisions. At this juncture, this seems
to be the direction that MMS is taking.

The
development of renewable energy facilities in the ocean, particularly wind power,
also is influenced by a number of other public policies. These policies continue to be in a state of
flux, thereby increasing the level of regulatory risk faced by entrepreneurs who
are thinking about constructing a wind farm in the coastal ocean. Among these policies are the reinstatement of
the federal production tax credit and the enactment by states of renewable
portfolio standards.

In
our study of the design of an appropriate policy framework for coastal-ocean
wind power, we have analyzed the economic implications of 16 generic features
of such frameworks. Among these
features, the following issues stand out as candidates for Congressional
clarification of regulations: multiple-use decision-making; financial terms and
subsidies; and environmental monitoring.I finish with a recommendation concerning sustainable financing of ocean
management.

Multiple-Use Decision-making

Most modern policy frameworks for
providing access to a natural resource incorporate methods of resolving
existing or potential conflicts among alternative uses. All of the policy frameworks in our database
incorporate provisions for consideration, at some level of detail, of
alternative uses of the ocean in areas where ocean renewable energy facilities
might be sited. The need for
methods of resolving multiple-use conflicts arises from the recognition that
allocation decisions may result in opportunity costs in terms of displaced
uses, including such “non-uses” as habitat protection or the supply of
ecosystem services. This need is a
reflection also of the incompleteness of property rights for alternative uses
of ocean space as a public resource and the absence of markets for allocating
ocean space as a resource.

Policy objectives for US
offshore renewable energy development, which relate to the prevention of
interference with other “reasonable” uses and the consideration of other uses
of the sea and seabed, require MMS to conduct multiple-use decision-making with
respect to the siting of renewable energy facilities. MMS appears to be moving in the
direction of analyzing the economic opportunity costs of siting renewable
energy facilities in the ocean, although there is no explicit mandate from
Congress to do so.

An
important need is for the development of estimates of “non-market” values. For example, the siting of an ocean renewable
energy facility may involve a change in the seascape. Both coastal residents and tourists may
benefit from an unimpeded view of the ocean, but this view is not a commodity
that typically is traded in established markets. Environmental economists have developed methods
for estimating non-market values, and these methods can be applied to estimate
the economic losses (or gains) associated with changes in the aesthetic
properties of seascapes. Areas where
additional research is needed include the selection of the most appropriate
analytical methods and the development of estimates of potential non-market
damages from siting ocean renewable energy facilities.

Notwithstanding the cumbersome nature of traditional
non-integrated management, a policy framework should incorporate methods of
resolving existing or potential conflicts among alternative uses. In practice, estimating the opportunity costs of
allocating areas for specific uses or for specific combinations of uses can be
very uncertain. Nevertheless, as part of
the process of conflict resolution, Congress might specify that economic policy
analysis be incorporated into a policy framework so that the government can
begin to systematically integrate estimates of opportunity costs into its
decisions about allocating ocean space. Such a comparison is needed especially where
renewable energy has been selectively subsidized.

Subsidies and Other Financial Terms

In general, exogenous subsidies encourage the
development of renewable energy in the United States. Within the maritime boundaries of coastal
states, the federal production tax credit (PTC) and accelerated depreciation,
state renewable portfolio standards policies, system benefits funds, and
property and sales tax abatements can lower the relative costs of renewable
energy construction and operation. Only
the federal subsidies (PTC and accelerated depreciation) would appear to apply
to developments in the US
exclusive economic zone, however.

The rationale
for such subsidies is to level the playing field for renewable power, with
respect to electric utilities that rely upon fossil fuels. Fossil fuel burning plants receive implicit
subsidies when they are not required to account for the external costs of
pollution, such as through releases of carbon dioxide or other pollutants. Little work has been undertaken to estimate
the scale of the subsidies enjoyed by fossil fuel burning plants and to
understand the extent to which subsidies for renewable energy do, in fact,
level the playing field. Congress might
encourage the development of economic models and the compilation and analysis
of data to understand whether the renewable energy subsidy appropriately levels
the playing field.

Policy discussions calling both for
subsidies for renewable energy and charges (royalties or other) for the use of
ocean areas are apparently inconsistent.Does it make sense both to promote ocean wind, for example, with a
production tax credit and accelerated depreciation on the one hand and exact a
royalty on the production of electricity from this same source on the
other? This question also raises issues
of the relative incentives faced by renewable energy developers in choosing
onshore versus offshore sites.

This issue may be
resolved, at least conceptually, by considering a sequencing of subsidy and
royalty. In effect, we might consider
one form of a variable royalty, known as a “Brown tax.” A Brown tax comprises an initial subsidy,
while cash flows are negative (say, through the initial expenditures to
characterize the relevant environmental parameters and to optimize the
operations of a renewable energy facility), followed by the payment of
royalties as cash flows turn positive. Because
wind power is subsidized with a production tax credit and accelerated
depreciation rules, these subsidies can be thought of as the “negative”
royalties that apply during the early phases of ocean wind development. Over time, these subsidies may be phased out,
and positive royalties could then be invoked.

A potentially useful institution
for implementing a variable royalty is known as a Townsend-Young “evergreen
lease.” An evergreen lease is renegotiated
after approximately one-half of the tenure has been completed: say, at ten
years on a 20-year lease. Evergreen
negotiations for a renewable energy lease might involve an increase in royalty
payments, in line with the sequencing of a Brown tax. Although the precise details of a variable
royalty/evergreen lease method would need to be ironed out, and the nature of
incentives thereby created would need to be scrutinized carefully, this kind of
an institution may make sense for both the government and energy producers where
rents are expected to increase over time due to expansion in demands for both
ocean space and electricity.

As a further consideration, we
might expect that many areas of the ocean initially will be provided to
industry on a first-come, first-serve basis for the siting of renewable energy facilities. As ocean space becomes increasingly scarce, however,
methods of competitive bidding and allocation will come into play. Under a policy framework that mandates a
competitive process for allocating ocean space for renewable energy
development, prospective developers will bid away any subsidies as well as
resource rents. The bidding away of
subsidies implies that the economic efficiencies embodied in a competitive
access system may defeat the purpose of other policy objectives that encourage
the development of renewable energy through subsidies.

The existence of these
issues suggests that there is a need for Congress to encourage experimentation with innovative financial
institutions that would achieve both the development of renewable energy in the
ocean and a return for the use of ocean space as a public resource.

Monitoring

A
strong argument can be made for including provisions in a policy framework that
promote the collection of environmental monitoring data prior to the allocation
of legal interests. Such data can
improve our understanding of the value of ocean space as a resource for the
specific purpose of siting renewable energy facilities. Further, such data can help us to get a sense
of the opportunity costs of siting renewable energy facilities in the
ocean. Environmental monitoring data
could be collected by the government and released publicly or through a
permitting program for prospective renewable energy developers. Alternatively, prospective developers might
be encouraged to pool their resources to conduct environmental monitoring
efforts in areas that show promise for renewable energy development. A policy to pool monitoring efforts would
reduce the waste associated with duplicate monitoring efforts in the same
location.

Congress
might usefully require the implementation of a national environmental
monitoring effort to assess the characteristics of ocean space as a
resource. This national effort could be
integrated into complementary efforts on the development of regional and
national capacities in ocean observation systems.

The
external effects of renewable energy facilities in the ocean are not normally a
function of output (electricity) but instead of the placement of the
structures. Once rock piles, towers,
turbines, or floating facilities are in place, both the view and, potentially,
the habitat have been altered. Short of
removing the structures, there is little that can be done to mitigate adverse
effects. As a consequence, relative to
the more common types of pollution-generating facilities, there would appear to
be a reduced need for the ongoing monitoring and enforcement of ocean renewable
energy facilities.

The siting of the first generation of renewable
energy facilities in the ocean may be understood as a kind of scientific experiment. The understanding gained from these initial
experiments undoubtedly would be of use in subsequent decisions about the
location, scale, and patterns of renewable energy development. Congress might encourage the undertaking of
research efforts to design and evaluate the results of these
first-generation experiments.

Sustainable financing

I’d like to add
one final word about the sustainable financing of ocean management. One of the key recommendations of the US
Commission on Ocean Policy was the need to assign returns to the public from
the use of its marine resources, such as bonuses, rentals, and royalties for
offshore oil and natural gas, to help fund oceanographic research, monitoring,
and conservation and management of the marine environment. As I mentioned above, under the Energy Policy
Act, MMS is to establish financial
terms that ensure a fair return to the United States for the granting of
rights to renewable energy development.Further, MMS is to establish a revenue-sharing program with coastal
states for grants within three nautical miles of a state’s submerged lands. Following this policy, and other precedent
embodied in the use of OCS revenues for the Land and Water Conservation Fund
and the National Historic Preservation Fund, Congress should require that remaining
revenues from the siting of renewable energy facilities be used for sustainable
financing of ocean management.

Originally published: April 24, 2007

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